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Comment of the Day: A Different Kind of Money

COMMENT OF THE DAY: A DIFFERENT KIND OF MONEY “Could the banality and sameness of what developers in Houston are constructing be in part to changed lending standards by the banks?
Back in the 1970′s Gerald Hines developed very innovative office buildings for the day, employing famous architects for the design. Pennzoil Place is no cookie cutter “international style” box, that’s for sure. But back then, we didn’t have interstate banking either. For those of you born post 1985, that means ALL of our banks were headquartered in Texas. I’d assume Hines went to see Ben Love at Texas Commerce Bank, or the guys at Allied Bank, and they worked out the loans. Today, those loan officers are in New York or Charlotte, and don’t want to risk their bank’s money on something avant garde.
Also, developers today rarely keep their portfolios together more than a few years. They ‘flip’ their completed properties to REITs so that they have the capital to build something else. When you need to turn your property over quickly, it’s best to have something the buyers understand, and that didn’t cost so much per square foot that you can’t make a profit selling it in 18 months. A REIT just wants to purchase something with what they feel will be a certain stream of income over a 10 year time horizon. They are oblivious to the fact that it’s not a thrilling design.” [ShadyHeightster, commenting on The Muse Moving in Next to the Post Office in Castle Court]

17 Comment

Couldn’t agree more. Especially regarding lending. Banks don’t do loans anymore. They simply originate them. You could know the bank president and be the best borrower in the world. But if your loan doesn’t fit into a small confirming loan, then no “3.x% 30 year lending tree type loan” money for you.
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Why? Because the banks can’t sell off the paper. Any real loans they do are much much higher rates, even if they’re just as safe (or safer). Same reason why private / equity financing, even with “safe” lending (compared to a confirming mortgage) can be at 10%. Or even 15%.
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I could go on but the points been made. Real interest rates are not what you see advertised as that’s phony conforming government sponsored rates that almost no one can get. Real rates are much much higher.
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Boring loans that have to fit into a generic box so they can be sold off, leading to boring properties (generic boxes, if you will :) that can be easily financed the same way.

I blame everything on banks, including that damned cowlick on my right front temple.

Seriously though, it’s a theory that makes sense. Might be why so much “interesting” stuff is put together by the artsy fartsy types – they don’t do things the traditional way, especially when it comes to finance.

Are there any cities when most new apartment projects are architectural masterpieces or isn’t it really the same in any city in the world? Most residences built play the safe card, but people are drawn to the ones that don’t and spend more time thinking and analyzing them. Just be glad we’re not through up russian apartment blocks, the most depressing architecture I’ve ever seen.

I do agree banking flexibility (euphemism!) is part of the problem here.
I was a young designer with Citicorp in 1983, and commercial bank deregulation allowed us to put new offices in 13 major US cities. It seemed cool to share the best of the big apple with ‘everyman.’
Remember how high interest rates were then, too?
But, there is a down side to the free-for-all, to globalization. You want to get McDonald’s in Paris? No problem.

There’s plenty of eccentric millionaire money around. I guess they are just more private that they used to be? (My husband’s boss keeps bars of silver in his basement, for example.) Or, they prefer to spend their money on credit default swaps than cooky real estate schemes. C’mon rich people! Do something interesting.

The availability of $$ also has to do with the notion that conventional rates are too low. The bankers, regardless of what you say about them, do not want to loan right now with rates so low. The bankers have no incentive to bear any risk when the rates are so low. Don’t get me wrong, I am not a fan of the banking industry but they too are in it for the $$.

Kevin: they can loan at a higher rate if they wish. The demand is there.
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If a bank would do RE loans at 8% with a reasonable down payment, or even higher I’d be there every day.
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I’m taking a loan at 10% interest (!) that is ultra safe for the lender (4x the equity being used to as collateral) and even THAT loan was a pain to get.

Cody, I too am in the multi-family business and agree with you and you are right that in general the loans are next to impossible to complete right now. The banks talk out of both sides of their mouth as well as their ass. yes, banks “can” loan at any rate that a customer is willing to borrow; however, until the banks have the backing of the fed on rates, they will still be next to impossible to borrow from. We missed a great opportunity to have not let a lot of banks fail; instead the banks were bailed out. The bank bailout did not stipulate that the banks get into the lending business so the result was that their stock prices rose and they wanted to protect their stock prices by not taking on further risk. This combined with the banks not wanting to foreclose on non-performing loans and face the scrutiny of banking regulators, they continued and still continue to push defaulted and maturity defaulted loans down the road in hopes that the economy will turn around.

In short, until banks wake up and stop deluding themselves to the market dynamics, the eal estate and overall economy will continue to grind ever so slowly forward. Cody, as you are probably well aware the big game in lending currently is private equity and hard money.

Cody and Pat, thanks for your insights into real estate lending right now. As my initial comment tried to infer, only “safe” projects seem to be getting funded these days, if they get funded at all. Therefore doing some sort of cutting edge project becomes extremely difficult.
And I agree with Craig, today’s Texas billionaires have no swagger at all compared to 30 or 40 years ago. There’s an absence of local money in projects today, which leads in part to the homogenization of architecture and RE development.

@ Cody: Your properties on Richmond and W. Alabama are probably large enough in scale that they fit into the parameters of somebody’s sweet spot for lending, but in general you are operating properties that run a fairly high risk profile. Both occupancy and expenses are highly granular. And I know that you like to buy fucked up properties and un-fuck them; that adds a tremendous element of risk as well, and can complicate a small loan.

That’s another thing. The deals are also so small that a lender’s (or a mortgage broker’s) fixed costs to process and service a loan or to bother to foreclose on it if necessary make the deal less attractive.

I’d suggest that you line up some meetings with the guys at Apartment Realty Advisors, Houston Income Properties, and LMI Capital. These firms are multifamily specialists. Talk about where you are and want to be in ten years. Let them connect the dots for you. Once you’ve got a strategy that fits within the parameters of what is financeable, communicate to them what it is. They all know each other and understand what works and what doesn’t. Let them bring you deals that are doable so that you can be the one doing them. There’s always a need for competent do-ers.

Just understand that you might find yourself in neighborhoods that aren’t as sexy as your home territory, places like Pasadena, Aldine, or Sharpstown. Be prepared to go wherever the IRR is.

Your average bank loan officer would not know Phillip Johnson from Magic Johnson. Something off the wall avant garde might get a bank to have cold feet, but by an large the decline of admirable architecture is simply a function of developers trying to keep design and construction costs as low as humanly possible while still building something that people will want to rent/buy.

TheNiche: I actually respect the fact that a bank wouldn’t want to lend — as a primary lender at close — on some of the properties I buy. However, even on a messed up property — at some point, with a large down payment, A+ location, and track record, where you’re borrowing less than land value, you’d think the bank would say ‘okay’. In other words, at some point, the loan essentially has no risk.
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Almost all my proprieties have been bought via seller finance, cash, or the bank coming to me and saying “take this thing!”. Where I’m frustrated with lending is on the refinance once I ‘unfuck’ a property (to put more, better, or longer term debt on a place). Or, when it comes to 1-4 family properties. i.e, my office space that I have to pay cash. My fourplexes that we own outright that I can’t refinance, etc. because it’s not a conforming loan.
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Funny side: I have a single family owned all cash. I tried to refinance out 50% and couldn’t (omg! Cash out! Risky!) yet my little brother who makes far less is able to buy it from me as an investment property with almost nothing down and cheap 30 year rate. So yeah, things don’t make sense right now :)
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(PS: Thanks for the names/contacts)